Drift and Shock

This is a survey of modern history from a global perspective. Part Two begins early in the twentieth century, as older ways of doing things and habits of thought give way. What follows is an era of cataclysmic struggles over what ideas and institutions will take their place. The course concludes in the present day, as communities everywhere are transitioning into a new era of world history. Again we work hard to grasp what is happening and ask: Why? Again we are drawn to pivotal choices made at key moments by individuals and communities.

教學方

Philip Zelikow

腳本

In an earlier presentation, we talked about the unheralded creation of

a new global financial system in the late 1970s and early 1980s.

I talked about an impossibility theorem where you

have a trilemma, and you have to make certain choices.

And I said that, in effect, political leaders prioritize the free

movement of convertible money at the expense of national economic independence.

That's a little more like the gold standard

system of the late 1800s and early 1900s.

The gold standard system had a lot of advantages:

money moved back and forth, financing was really easy for companies

that wanted to conduct business overseas. But, downsides.

Because money can swing back and forth from one place to another, the

danger of volatility, of financial crises, goes up.

And that's exactly been the pattern in the 1990s

and in the last decades: more frequent financial crises,

the most severe of them being the crisis

experienced in 2008. I want

to call this explanation of it more money than

sense, in a way I mean that quite literally.

Let's look at global imbalances that emerged in the

behavior of the world economic system in the 2000s.

Alright. Here's a complicated chart.

I get this chart from the International Monetary Fund.

You don't have to understand all these initials up here.

The only thing

I want you to really focus on in this chart are these graphs.

Here.

And here.

These measure global imbalances as a percent of world GDP.

What do we mean about a global imbalance?

If a lot of people are running current account deficits,

that is, they're buying more stuff than they're selling back,

then they're in a deficit.

I'm paying out more money than I'm bringing in.

You can get a current account deficit from a lot of things.

If I'm buying more than I'm bringing in, or if I'm borrowing more

than I'm loaning out in return, I can get a current account deficit.

Some current account deficits, you know, surpluses

and deficits between trading countries, totally natural.

What was alarming is the huge increase in the scale of these imbalances.

And it's then really especially the huge surpluses.

This is a percentage of the world's gross domestic product.

So let's figure

that this period here, you see less than 1% of world GDP.

So, this is something in the neighborhood

of a $100 billion-$150 billion, something like that.

And that's pretty much a fair historical

range for what the global imbalances had looked like.

By this peak point

around 2005-2006, global imbalances had sharply

gone up from, oh, in the neighborhood of $150 billion

to this point, where you're more than two and a half percent, pushing three,

now we're at, like, $400 billion surpluses.

That's a lot of money, even in a giant world economy.

$400

or $500 billion in surpluses, and you can see that

the United States deficits are contributing quite a lot to that. That means that the surplus countries are sitting on hundreds of billions of dollars, and they need to do something with those hundreds of billions of dollars. Theyï¿½re sitting in their bank accounts ï¿½ I have hundreds of billions of dollars, what do I do with it? Well, Iï¿½m obviously not buying American goods with that, or else I wouldnï¿½t have this surplus and deficit.

So they can say well let me buy things that are priced in dollars.

Let me buy assets, land, deeds, mortgages,

bonds, that are priced in dollars with my hundreds of billions of dollars.

So there's therefore a demand for dollar valued assets.

And the same would be true

for Euro-valued assets between surplus and deficit countries in the Euro Zone and so

on, but I'm using the dollar case because it's the easiest one to understand.

Therefore, you would expect, with this huge amount of global imbalances,

that there would be a lot of pressure, a lot of demand for dollar assets.

Where there's a lot of demand for

anything, then you have a supply-demand relationship.

Just think about that.

All of you know from your basic economics that if a lot

of dollars are chasing after few goods, the price of the good is going to go up.

Supply, demand.

A lot of demand, limited supply, price goes up.

Now suppose there's

a lot of demand, not for consumer goods but for assets.

The price of the assets is going to go up. So here are hundreds of billions of

dollars looking for American assets. Let's say, housing, real estate.

So you would expect to see, because of

these global imbalances, a significant amount of asset inflation.

That is all those hundreds of billions of dollars chasing

after dollar valued assets and the price of those assets going up,

like the price of U.S. real estate.

Another interesting phenomenon that occurs is, hey, people want assets.

Can we create assets that we can sell to them?

And you say: Well, I get a mortgage on a house.

If I bundle together a bunch of different mortgages, I can

resell them as a new kind of mortgage instrument, I have

something else I can sell on international markets, and then maybe

I can even sell bets on the behavior of those mortgage

assets and bets on top of the bets. And so, asset inflation, asset invention,

and the asset invention looks like a good deal because the

price of the underlying assets just keeps going up and up.

Now if this goes out of control, two sorts of governmental systems have broken down.

Kind of stop for a moment, ask yourself: Who controls inflation?

Ordinarily, the kind of inflation people control

is inflation in consumer prices.

Consumer price inflation: CPIs.

So, like, the price of milk, the price of cars.

The way consumer price inflation is controlled is central banks do things,

raising interest rates, other things to try to dampen

demand, if they think inflation is getting out of control.

Well here's huge demand, but it's not for consumer goods.

It's not showing up in consumer price inflation.

It's showing up in asset inflation.

So, central banks, they see the asset inflation

going on, but they do nothing about it because, after all,

they're not ordinarily accustomed to wanting to control asset inflation.

they had the sense that they were riding something they did not understand and

they couldn't quite figure out where this was going to end

up, but, at the moment, they were making money from

it, and they didn't really even know what to do

about it and weren't 100% sure it was a problem.

So, no one intervenes to try to slake this demand,

to reign this in, until it's too late in 2008.

And then, of course, large financial institutions begin to collapse entirely.

Other financial institutions

are going to break down.

The whole banking system begins to break down.

Now, banking system, financial systems are kind of unglamorous.

But, in a way, for an economy they have the same function as your heart and your

circulatory system does. This is, in effect, a heart attack of the

global economy, and, of course, all the muscles, brain, they need blood

pumping through the circulatory system.

It doesn't take much of a heart attack to get everybody's attention.

As you can see here, this cartoonist

reflecting on what the bust meant for his generation of Americans.

So, here of course some drier data, not a

Cartoon, that shows you how the bust is playing out:

very sharp declines, not just in the

advanced economies but also in emerging market economies,

in both industrial production and in world trade.

Some recovery shortly after that, but then

you can see, actually, here it's sputtering

pretty close to the line of zero growth worldwide.

Another interesting thing to notice about

this chart from the International Monetary Fund.

is notice unemployment,

unemployment rates: contrast 2007 and 2013, so six

years, that's the unemployment rate for the United States over those six years.

That's the unemployment rate for the Euro Zone area

over those six years.

Middle East and North Africa a little worse, not much worse.

Actually Latin American countries a tiny bit better.

But that's a key point for the world economy.

Now the analogy everybody looks when they study this recent financial

crisis of 2008 is they think back to the Great Depression

of the late 1920s, early 1930s.

The causes of the Great Recession, though,

are pretty different from the causes of the

Depression of the late '20s and early '30s,

which I went over in another video presentation.

There are some things in common, but really quite a lot is different.

But also different is that, so far, the

Great Recession has not tumbled into a Great Depression.

Remember, back in the Great Depression, it wasn't just one event.

There was an initial series of events at the end of the 1920s.

Then folks were beginning to recover but

then there was another series of events, actually

emanating out of Europe in the 1930s, especially

1931, and that pushed folks over the precipice.

In effect, we've had that first stage.

We've had that terrific initial shock, and the great issue is: Are we going to have

another phase of economic crisis that will push folks over the edge?

So far, that second phase of acute crisis has been avoided.

Why?

How have we been able to manage the crisis?

Well first,

we've been able to preserve the international financial system.

How did that happen?

Looking back at the Great Depression period,

a key problem was actually a political problem:

the inability to cooperate among the key holders of the world's

reserve currencies, in figuring out how to coordinate their monetary policies

and support each other.

It very quickly became a situation of everyone for himself.

And here tensions between France and Germany were already a factor in Europe.

And then there were tensions across the Atlantic.

The breakdown of the World Economic Conference in 1933 as

the United States said, "We're going to take care of ourselves."

That has not happened this time.

The central banks have been pitching in to

help each other and sustain each other's reserve currencies.

When folks were having trouble taking euros or having trouble taking dollars,

central banks on the other side of the Atlantic intervening to help.

Those are fundamentally political decisions.

It looks like an economic judgment,

but underneath it is a level of political harmony that allows

this to happen. That's important.

A second aspect of crisis management is nationalizing debts.

What do I mean by that?

Let me give you a concrete example.

Let's take a federal mortgage insurance entity, Fannie Mae.

That's Fannie Mae is short for

something called the Federal National Mortgage Association.

Fannie Mae was a mortgage insurance operator, and they issued mortgages.

They underwrote mortgages to lots and lots of homeowners, and then, Fannie

Mae sold those mortgages as bundled instruments to investors, who

wanted to buy mortgages and get some of the interest being

paid by all of the people who were getting home loans.

So, Fannie Mae would

help be sure that people got home loans.

They'd bundle all these home loans, and

then re-sell them to, say, the Chinese government.

The Chinese government would use some of its many billions

of dollars in its reserves, remember that global imbalances point.

The Chinese government bought tens of billions

dollars of mortgage instruments issued by Fannie Mae.

Alright. So Fannie Mae's debts are falling apart.

A lot of those mortgages are just not going to be paid.

So what's going to happen here?

One option is, Fannie Mae just goes belly up.

Anybody who's holding a Fannie Mae instrument,

well, they're just stuck holding the bag.

In that case, the Chinese government, the bond holder, would be

left holding the bag, and the Chinese government might lose billions of dollars

that they'd invested in the United States,

maybe even tens of billions of dollars.

But that doesn't happen.

Instead, the United States government nationalized those debts.

The United States government essentially took over Fannie Mae and

said, if any of those things go belly up, that's on

the U.S. taxpayer.

That's going to be on the federal governmentï¿½s accounts.

Now that's real good news for the bond holders,

say, like the Chinese government which invested all

this money in US mortgage bonds and is now

being protected from losing a lot of that money

because the United States government has nationalized its debts,

and does that with other banks. By the way, similar things are happening in actions of European governments bailing out their banks. Now what does that mean? It means that the United States government, and those European government, have now assumed some pretty heavy losses.

That's very costly for those governments. If you add on those nationalized

debts, on top of money you're spending as, say,

stimulus to help get your economy back on its feet,

to provide unemployment compensation, things like that,

governments start running budget deficits. They're short on money.

So nationalizing debts is a crisis management tool.

Helps reassure foreign investors.

But there's a price,

itï¿½s that it puts a significant pressure on

your own national budget accounts, it takes those private problems and

makes them now public debt problems. And of course, that's why in the United

States, for example, we have constant running controversies now about American

deficits and tax increases. Another form of crisis

management is to do things to encourage people to

spend money, to borrow money, keep the economy going.

The government can simply print money and spend it.

Also, the central banks can reduce interest rates and

encourage people to borrow money and reduce interest rates

almost to the point of being virtually zero.

The

United States government, European governments, the Japanese government,

they've all done this,

pretty much to about the limit they think they can prudently go.

They've all found that that gets you

something, but it doesn't get you very far.

It's a little like providing a patient in the hospital with an adrenaline shot or

someone who's feeling their energy flagging and eats a lot

of sugar. You can get that sugar high, that'll get

you going for a while, but it'll only take you so far.

It doesn't necessarily strengthen any of

the underlying muscle tissue of the economy.

It doesn't necessarily rebuild the quality of your financial system, the quality

of that heart and circulatory system that you need to be pumping a lot of blood.

For that you might need deeper structural reforms.

But these are all things that one

can do as crisis management, and so far crisis management has succeeded.

Now, since the United States, Europe, and

so on, they've had this tremendous economic shock,

does that mean that the model of global capitalism has now come to an end?

That, that whole system created specially in the late 70s

and early 1980s has now shown that it's no longer valid,

and we're going to turn across the world to different economic models?

Well, to tell you the truth, I don't know the answer.

I can see, though, that there already some immediate effects. For example, the United

States found itself, during these wars of the 2000s, with an unwanted empire.

It was occupying the country of Iraq. It was setting

up a protectorate in the country of Afghanistan.

I'll tell you, whatever people may think around the world,

the vast, vast majority of the American people do not want

to rule the country of Iraq, and they do not

want to rule or be responsible for the country of Afghanistan.

They want to get out of those

responsibilities as quickly as they possibly can.

In the case of Iraq, they've done

so and they're on their way to doing so in the case of Afghanistan,

and certainly having financial and fiscal crises only adds

more momentum to devolving itself of an unwanted empire.

What about the challenge to global capitalism?

Does this crisis mean that

the 1980s globalized model is dead

and that some other model will take its place?

Maybe a model where the example is being set by China?

Does it mean that we need to have a more national financial system?

That the whole trilemma bargain we set in the early 1980s needs to be reconsidered?

Instead of free-flowing money, we now, to have national economic systems again that

radically reduced the flow of global capital

So far, that hasn't been the answer.

Will this create a challenge to social democracy?

Think a

little bit about the structure of modern governance.

50, 60 years ago, in the 1950s, look

at where government spent most of their money:

In the United States, other advanced countries,

most of the public money was spent on defense.

Some significant amount of money was being spent on social welfare: 20, 30, 40%.

But 60-70% of the national government budget went to defense.

All those proportions are now hugely reversed today.

Now, in the United States, and all the other advanced countries,

including Japan, the large majority, 70- 80% plus,

of their national government accounts is being spent on social welfare.

Now those expenditures are under much more pressure.

A lot of these debts have been nationalized.

Populations have been aging.

Will the social democratic model of big

government helping to somewhat redistribute money,

provide social welfare, help manage some of the tensions of global capitalism,

is that model still viable?

Well, if your answer to either of these questions is maybe not,

think about what are the alternatives, because one of the points we've

been making all through this course is to think of situations, problems, solutions.

So there are choices, it's not

just abstractly saying: Well that doesn't work.

That's bad.

People won't change unless they think they've

got something better to take its place Well,

what are the alternatives then? Alternatives could be

things like: Are we seeing a

widespread renewal of interest in democratic socialism?

Are we seeing a widespread effort

to create national capitalism

to take the place of global capitalism.

By the way, the Chinese model of state capitalism with

lots and lots of powerful state owned enterprises is a

pretty interesting hybrid model of national capitalism at home with

a tolerated degree of participation in global capitalism as a whole.

But is the Chinese model itself viable for the long haul?

Is the Chinese model really a possible replacement for the models of America and

Europe? Or is there some other model that I just donï¿½t have the wit to think of? Those are some of the issues created by the current crisis. Itï¿½s not the only kind of challenge weï¿½re going to have to think about as we look at this transitional period of world history. Weï¿½ll tackle some others in the next presentation.